How much you really need to retire

Here’s the cost of a typical middle-class retirement

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From the November 2014 issue of the magazine.

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Many advisers say you need retirement cash flow equal to 70% to 80% of your peak pre-retirement income. While that would be nice, most Canadians retire comfortably on far less.

“I get so upset when I hear advisers telling clients they need 70% to 80%,” says Annie Kvick, a certified financial planner and associate with Money Coaches Canada in North Vancouver. “I’ve had clients come to me at 67 and they’re still working because their adviser told them they didn’t have enough. When I looked at how much they really needed, I found they could have retired five years ago.”

In my view, a better rule of thumb is to aim for a replacement ratio of 50% to 60% for couples, and 60% to 70% for singles, assuming you have a paid-for home and your kids are financially independent. Better yet, use actual dollar figures. Typical middle-class Canadian couples can live comfortably on $42,000 to $72,000 a year ($30,000 to $50,000 for singles), again assuming no mortgage or child costs.

If you wonder how you can make those figures work, consider the middle years of your working life when you probably carried a hefty mortgage, supported children, paid for work-related transportation and wardrobe costs, saved for retirement and paid a lot of income tax. In retirement, you get to strip out most of those costs, so you can have a similar lifestyle on much less income.

Adjusting to such a reduction in income is not always easy, so be careful not to ratchet up your standard of living too much while you’re working. That can happen if, after paying off your mortgage and getting the kids launched, you get used to spending the extra on luxuries.

“People need to ask, ‘Is this the standard of living that I can maintain throughout retirement?’ It may be time to step back and say, ‘We’ve been living high off the hog, but we can’t sustain this’,” says Lee Anne Davies, a retirement educator with Agenomics. “I don’t hear enough people being honest about their lifestyle and that’s the conversation you need to have with yourself.”

Even in that situation, the good news is you likely proved you could live modestly in your middle years. In many cases you should be able to do it again in retirement without great sacrifice if you have to.

Finding your number

How much do you need to save, anyway? Here’s the cost of a typical middle-class retirement starting at age 65(1)

money_to_retire

 

Notes: (1) All amounts are in 2014 dollars, reflecting current purchasing power. Spending projections for subsequent years are adjusted for inflation, so real purchasing power would be unchanged. (See “What’s Your Magic Number” in the Summer 2013 issue for more.) (2) Typical middle-class income before tax. Assumes a paid-for home. (3) Typical annual amount for Canada Pension Plan and Old Age Security based on retiring at age 65, assuming a fairly long career at average salaries or better. (CPP and OAS are adjusted to pay more if deferred, and CPP is adjusted to pay less if started earlier.) We’ve assumed no employer pension, but this should be included here if you have one. (4) Approximate amount that can be withdrawn from initial nest egg if retiring at age 65, with only a small risk of outliving the money, based on a rough consensus of experts. (5) Required at start of retirement at age 65 (C/D). You’ll need more if you retire earlier, or less if you retire later.

22 comments on “How much you really need to retire

  1. Hi David,
    You have hit the nail on the head without beating the bush. Thank you for the honesty. Most of the CFP don’t have any clue whatsoever – especially those who work in Multi level financial agency. They blindly follow what they are told (make money by making people unnecessarily over invest) To top it all most of them don’t even know to read an annual report (Shudder to think how they pass various industry self regulated exams). Anyway, Thanks once again.

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  2. Just a quick question: I am always confused at whether the numbers being used are gross income or net after tax income?

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    • Net, after tax!

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      • No, it’s gross: “Annual spending in retirement, including taxes”. And all the other figures are gross too except , of course, the “Sustainable withdrawal rate” which is a percentage.

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  3. Having reached that Nirvana state of a senior, I can agree with much of what the author is stating. Having a Defined Benefit pension Plan, a paid off mortgage and savings, and as a single male I am living comfortably on half of my working salary.

    However, as one moves to a more elderly age be aware of increasing medical costs which are not always covered by individual extended medical plans, which can reduce or wipe out savings in a hurry. Most of us will end up in a public or private nursing home. Private nursing home costs can wipe out most retirement savings in a hurry.

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  4. Hello.. I am single 62 years old, I have RRSP’s which I use when needed. I work part time earning $10-12K per year . I took my CPP early. I have no dependants and no one to leave my paid for condo to. So do I consider the value of the condo in my overall retirement portfolio? Hypothetically if I have 200K in RRSP and the condo is valued at $200 K . What kind of income stream can I allow myself to have based on these amounts? Thanks

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    • Your best option is to study the subject your self . Your net worth is too low ,to get good advise -if your real lucky you may find not a salesperson ,, but odds are that is what you will get.

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    • You can’t consider the value of the condo as you need the condo to provide your shelter. Since you’re only 62 you can’t start liquidating the condo.

      You can only consider the $200k in RSPs which could realistically generate 4-6% in moderately safe income yielding equities. So, $8,000-12,000/year or $667-1,000/month.

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      • I am 78 years old. Retired 3 times. I am still working, other wise I would go crazy doing nothing. Seven years ago I got sick of having my money in the bank in G I C -s for 1 or 1 and a half %. I went to school to learn to be a Financial advisor. I worked at it for about a year or so .
        I invested my money, my daughter, and some friends money. Then I stopped , because I am not a sales man, and ran out of clients
        You surely can make more than 6-8 % if you invest with the same company I am with.

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        • What company are you with?

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  5. The Taylors income is approximately the same as my wife and I but due to income splitting pay no income tax. $5000 seems high for $42,000 family income.

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    • It is to the financial industries benefit to perpetuate the myth of needing 70 to 80% of your pre retirement income. I will be 55 this spring and will be pulling the plug. I have enough saved to support my life style. Not going to get caught up in the idea that another few years of work will give me a better buffer. The value of my time is now more to me than just additional money. It is a little dauting to quit a very good paying job though I have to admit.

      I have no debt, pay off credit card balances every month. Have many and varied hobbies. Lot of my liesure activities are low cost, hiking and photography and writing.

      May work part time at some point if my liesure activities don’t keep me busy.

      I think some hang onto full time work longer they need to because of the fear of change.You get in a ‘comfortable rut’ in many jobs. It is a routine that is hard to break for some. Others have such elaborate life styles with so many ‘things’, they can’t fuction on a lower income. It took me a long time to figure out that the accumulation of a lot of stuff does not really bring happiness. This idea must be terrifying to the marketing world that bombards us every day with the message you need more stuff in your life.

      Maybe it is an age thing, but I get the morning paper and see how many people my age are in the obituaries every day. No one plans for an early exit from life. Every day is a gift, make sure you are doing what you want to do now, don’t assume in five years your health will be the same.

      I like ‘adventure’ style holidays. My wife and did the last 210 km’s of the Camino in Spain last year and we are going back next year. Hiking 20 to 28 KM’s is possible for us now, but who knows in 10 years from now?

      As the old saying goes, no one on their last day on earth will wish they spent more time at the office.

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      • A lot of truth in your comments, great posting Mark!

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      • Great posting! It almost feels like I posted it, I am 42 and will be don’t at 55. (Unless my kids go to medical school)

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      • Hello Mark. I too love your post. I see it is a few years old now and wanted to know if you still feel the same way now that you have had some time to settle into your retirement? Since I was 19 years old and hearing about Freedom 55 from my Uncle, I financially set a goal to retire at 55. When I hit the magic age, I felt it was too young. Two years have gone by and now I am not sure if I am still working because I am afraid to quit a very good job or because I really still want to work. I seem to go back and forth in my mind. Any advice?

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  6. RRSPs are fine until one partner passes away. Then no pension splitting, higher taxes, possible OAS clawback to consider. I’m inclined to believe that if you have a defined benefit pension plan that you forget about RRSPs.
    Also how the Canada Pension Plan determines the survivors benefit is outrageous. If both contributed to the plan then the benefit should surely be calculated individually too.

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  7. When you quote the amount that you have to save for retirement (item E), are you referring to cash after tax amounts or pre tax amounts such as RRSP’s?

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  8. I would like to know the amount required for retirement are gross amount or net amount?

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  9. “Typical middle-class Canadian couples can live comfortably on $42,000 to $72,000 a year ($30,000 to $50,000 for singles), again assuming no mortgage or child costs.”

    So, based on the current Canadian median individual income of CAD ~32,000, you do need ~80% of your peak pre-retirement income to retire “comfortably”.

    Source:

    http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil105a-eng.htm

    Thanks for the confirmation. (But, not for the misinformation).

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  10. My husband and I started late in life buying a home and investing for retirement due to working for very little to live the lives we wanted. Five years ago our lives changed and we were able to buy a modest house and start to save. Now it has changed again and we have more disposable income. Should we pay down our mortgage as fast as possible, or continue at the current rate and majorly bump up our RRSP contributions or should we do a combination of both and if so which one should we impact more? We should have a modest but suitable income from what we are currently on track to save and are considering

    Changing our Amortization from 25 years to 10, keeping our RRSP contributions the same and then when paid off we put that whole mortgage payment into RRSPs for the last 7 years before we retire

    Changing our Amortization from 25 years to 15 years and raise our RRSP contributions an extra $1000 month

    No change to our Amortization for now, and put an additional $2500 per month into RRSPs and continuing that mortgage into our retirement by 5-10 years.

    What is the best option?

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  11. Great post! I was scrambling to get answers to these questions myself and I see that a fixed percentage is misleading. I always joked , I will take a 50% pay-cut before retirement so that I can meet 100% of my pre-retirement earnings. I calculated how much I spend today (earnings – taxes – savings ) and subtracted work related expenses and mortgage. After factoring in CPP and OAS I will only need 16% of my earnings to maintain my current spend in today’s dollars.

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  12. First of all, I think it’s very sad to hear some people say ” I’ll go crazy if I did’nt work. There are hobbies, sports, travel, reading, night school for interest coarses, grand children to intertain, card playing clubs, volunteering, music, much much more. How can people not have anything to do, are they brain dead?
    Next, I think people can live very well on $1500/month. This money you get from CPP, OAS and GIS. Any other income is fun money for other things. I mean, how much does one need to spend to live a decent lifestyle. You have to keep track of where your money goes, as you always did before. $18,000 a year income is a nice income for a single person to live on.
    Another thing, concerning F.P’s. Their job is to handle the paper work for investing your money. It’s up to YOU to check its performance. They can’t do that for you and thousands of others. They don’t have time

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